How can merchants use the US vs Visa and MasterCard settlement to lower  costs and improve EBITDA? Most believe the most critical element to any solution is knowing exactly what merchant fees are for cards presented. Thus while the settlement is a huge win for merchants, The Federal Reserve Bank of Boston concludes merchants do not likely have the information or capability to fully take advantage of the new rules. IN this article I’ll review how merchants can use our CenPOS technology to leverage the new rules, without needing  to decipher the interchange rate for every transaction in real time.

Note that American Express did not participate in the settlement, thus any suggestions do not apply for their brand.

This is an excellent article and I recommend reading it. Federal Reserve Bank of Boston Public Policy Discussion: An Economic Analysis of the 2010 Proposed Settlement between the Department of Justice and Credit Card Networks. Excerpts:

In 2010, the Department of Justice (DOJ) filed a lawsuit against the credit card networks American Express, MasterCard, and Visa for alleged antitrust violations. We evaluate the extent to which the recently proposed settlement between the DOJ and Visa and MasterCard is likely to achieve its central objective: “…to allow Merchants to attempt to influence the General Purpose [Credit] Card or Form of Payment Customers select by providing choices and information in a competitive market.” In word and spirit, the Proposed Settlement represents a significant step toward promoting competition in the credit card market. However, we find that merchants are unlikely to be able to take full advantage of the Proposed Settlement’s new freedoms because they currently lack comprehensible and complete information on the full and exact merchant discount fees for their customers’ credit cards.

The basic problem is that merchants currently lack sufficient information to disclose fees or differentiate their prices according to the method of payment. In theory, the Proposed Settlement would allow merchants to try to steer consumers toward lower-cost payment instruments by disclosing the fees merchants incur in accepting payment cards, and by offering enhanced discounts. In practice, however, merchants may not be able to use these privileges effectively because they may not know the exact merchant fee on each credit card until long after the transaction has taken place, and even then merchants typically learn only their aggregate monthly fees and not the specific fee for accepting a given card. Interchange fees—which account for the bulk of merchant fees—range from below 1 percent to over 3 percent. Merchants may be aware of this range, but they currently do not have all of the information they need to enable them to match an individual credit card presented by a consumer to the corresponding merchant fee for that card. Therefore, merchants would not be able to disclose the relevant card fees to their customers or to completely and accurately differentiate prices across payment instruments.

If merchants had the necessary information in real time (that is, at or before the time of the transaction) to facilitate the mapping of cards and fees, under the Proposed Settlement they could attempt to steer customers toward lower-cost payment methods. However, merchants would still be restricted in the mechanisms they could use to this end because the Proposed Settlement did not challenge the Visa and MasterCard rule that prohibits merchants from imposing surcharges that reflect the costs they incur in processing payments.

End excerpts.

The new rules, together with Dodd–Frank Wall Street Reform and Consumer Protection Act, empower merchants with new flexibility to manage costs. The industry response is that only the biggest of merchants can benefit from the settlement. But that’s not true. Our technology enables merchants to provide discounts right now.

Ideas to reduce payment processing costs based on new rules:

1. Check your merchant agreement schedule A. Does it state anywhere on the agreement “pass through interchange”. If not, your options to reduce fees may be limited.
2. Put up a sign for a minimum charge amount. (Minimum cannot apply to debit cards.)
3. Put up a sign informing customers of really basic information. For example,  you could put up a sign “Please help us keep costs low by using your debit or check card. For every $100 sale our costs average: Cash $0, Debit/ check card $.90, credit card $1.85, rewards card $2.50.”
4. Implement our CenPOS technology and offer discounts based on rules you set. For example, do you want to offer a percent or a flat amount? Do you want to offer the rule only if they use one card brand such as Visa? Only over a certain amount? Only on certain days? The options are endless and can be remotely managed in real time, completely removing cashiers from any part of the discount process.
5. Identify your average ticket and average cost per transaction. Test and measure different incentives to customers using CenPOS.
6. Implement CenPOS technology in a retail setting and steer customers to enter their pin number, reducing risk of chargebacks. The 2010 national average for pin debit penetration was less than 29%; CenPOS users averaged 74%.

Considerations for offering incentives of any type or payment steering.

• Do you know what percent of your transactions are debit right now?
• Do you know what percent of your transactions are any type of card right now?
• Do you know your average cost per transaction on debit? On other card types?
• Do you know if card type usage is cyclical by time of day, day of week, location of your facility, or how payment is accepted (retail, online etc)

CenPOS technology provides real time information about all of the above so you can manage how and what type of discounts to offer. Merchants can use integrated check and ACH services with CenPOS.

CENPOS SALES: Call the credit card processing hotline at the top of the page for direct merchant sales, ISO sales, and other 3rd party reseller sales.

March 2011 3D Merchant newsletter reports on CenPOS mobile platform, ACH, check processing and other hot topics.  CenPOS continues to lead the entire industry as THE single solution for merchants to accept payments of all types, deliver time-saving comprehensive reporting, and offer least cost routing, eliminating errors that result in higher interchange fees.

With the Durbin Bill enactment just a few months away, merchants are scrambling to prepare for expected lower cost debit fees. The open public comment period is now over, the final details are in committee, and the Federal legislation will go into effect July 1, 2011.

CenPOS customers averaged 75% pin debit vs. signature debit in 2010, almost double the national average for non-CenPOS customers. If a proposed two-tier debit price system evolves, CenPOS customers will be in the optimal position for lowest processing costs.

The new CenPOS Mobile platform is currently running on the Apple line iPhone 3 and 4,iPad and iTouch. CenPOS fully supports card swipe as well as signature capture on the telephone device.

Click image to download the 2.8 MB PDF March 3D Merchant and CenPOS newsletter on mobile payments, ACH, and check processing.

About 3D Merchant Services: 3D Merchant Services is a marketing and consulting enterprise and does not issue merchant agreements. Owner Christine is a direct agent for merchant products and services offered, including CenPOS, where she reports directly to the CEO.

According to a Federal Reserve report, Interlink, Star, Pulse, and NYCE have the largest the market share for PIN debit transactions. The shares are Interlink 37%, Star 29%, Pulse 11%, NYCE 8% and other 15%, as of 2007. The report calculations reference Nilson Report and other industry sources for the data.

This is good background information when looking at least cost routing.

Insights on the debit card portion of the Dodd-Frank Wall Street Reform and Consumer Protection Act are presented in this blog article. As complicated as the credit card processing industry is, it’s not surprising that those outside the industry, including the media, miss some important points. The debit card proposal by the Federal Reserve would establish debit card interchange fee standards and prohibit network exclusivity arrangements and routing restrictions. The media response is growing as the end of the public comments period nears, and today I read Debit card fees headed lower for merchants, published by the Sun Sentinel, a South Florida newspaper.

PART ONE: WHAT MERCHANTS REALLY PAY

First, let’s examine the often repeated cost merchants pay. The numbers reference 2009 Federal Reserve data. The “average debit cost is $.44 per transaction based on 1.14% of the purchase price. $.56 on swipe debit and $.23 on pin debit”.  Other than Wal-mart, you can bet most merchants pay more than this. Signature debit interchange is currently .95% for Visa and 1.05% for MasterCard, plus $.15 each. The example below is for a SWIPE RETAIL transaction.

$38.59 Average transaction using standard sale referenced

$.37 @ .95% interchange, non-negotiable.

$.15 per transaction interchange, non-negotiable.

$.04 Dues and assessments, non-negotiable.

$.08 merchant discount at 20 basis points, negotiable.

$.15 authorization, settlement, capture, varies by vendor, partially negotiable.

$.79 total cost to merchant= 2%

My point is that interchange is only part of the merchant cost. Pin debit has changed in the last 24 months. Merchant used to mostly pay a low fixed cost per transaction, but now that has shifted to more closely resemble the interchange table.

Here’s the same example using Interlink, one of the most popular networks.

$.31 @ .80% interchange, non-negotiable.

$.17 per transaction interchange, non-negotiable.

$.00 Dues and assessments, non-negotiable.

$.08 merchant discount at 20 basis points, negotiable.

$.15 authorization, settlement, capture, varies by vendor, partially negotiable.

$.71 total cost to merchant= 1.8%

A $.23 average pin debit cost is a thing of the past. It used to be a flat fee for pin-debit, but now virtually every network has moved to a percent of the sale, plus a pretty high transaction fee and no cap.  See    Pin-debit network fees 2010 chart for more details.

Media reports of merchants adding 1-2% to their products and services to cover costs is probably not enough on the low end. The ‘targeted average interchange is 1.79%’ according to a Visa report two years ago. Only the most efficient merchants are achieving that. Small businesses and many other retailers average over 2%. Internet companies pay higher fees. 2% tacked on to goods and services is more realistic.

PART 2 WHAT IT WILL COST UNDER THE NEW PLAN

Here’s what the proposal states. “Two alternative interchange fee standards would apply to all covered issuers: one based on each issuer’s costs, with a safe harbor (initially set at 7 cents per transaction) and a cap (initially set at 12 cents per transaction); and the other a stand-alone cap (initially set at 12 cents per transaction).”

It LIMITS what card issuers -the banks- can collect! It does not limit what the associations i.e. MasterCard, Discover, and Visa who set interchange rates, can charge. Merchants who think they’ll be paying $.12 a transaction in the future are being misled. Costs will almost certainly go down, but who knows what this will really shape into.

HOW CAN MERCHANTS LEVERAGE DEBIT INTERCHANGE FEE CHANGES

One idea being bandied about is discounts. The same Federal legislation signed into law in July 2010, enables merchants to offer discounts to buyers. For example, a merchant can offer a discount if the consumer chooses debit over credit.

What merchant will want cashiers making decisions about whether the card qualifies and how much of a discount the consumer can receive? The mistakes alone could offset any gains. Lucky for me, we have a technology solution that solves this problem for merchants. Here are some key elements:

• Identifies type of card.
• Automatically calculates discount and puts it on customer receipt.
• Merchant can view trends to determine when to offer the discount. For example, why offer a discount in the morning, if most customers already use their debit card during that time of day?
• Merchant can remotely turn on and off messaging at the consumer terminal with the discount offer.
• Cashiers are completely removed from the process of identifying any type of card. This has proven to increase pin-debit penetration from under 15% to over 75%.

THE REWARDS CARD DEBATE

Are consumers so attached to their rewards they won’t give them up? Everyone understands there is a cost associated with rewards, right? Banks will have to adjust their fees or their rewards plans, but it’s only debit cards, because credit cards are not affected by the proposal. Banks have been expanding rewards card plans on debit cards to collect more fees.  When the consumer enters their pin number, the bank won’t get that fee any more. The merchant also reduces risk because chargeback’s are eliminated. In my opinion, consumers will choose free use of their debit cards over rewards, and simply switch banks if they have to pay a fee.

What will merchants really pay in debit card fees under Fed proposal? I don’t know, but I’m certain of one thing. It won’t be $.12 a transaction.

PIN Debit Network Fee Schedule Fall 2010

With 2010 debit fee updates, signature debit and pin debit potentially can cost about the same to merchants. 70% of pin debit transactions recently qualifed for either .95% + $.235 per transaction or .80% + $.2125. With Visa signature debit interchange now at .95% and $.15 per transaction, the cash benefit of pin debit transactions has eroded.

However, it’s important to look at your payment processing price plan. Are you paying percentage merchant discount on both debit and credit transactions, or just credit?

Pin debit benefits include reduced risk. Consumers cannot initiate a chargeback on a pin-debit transaction, but they can on a signature debit.

The list below is a compilation from various sources.  If you have interchange pass-through pricing, these are listed under “interchange costs” on your merchant statement. Interchange costs are hard costs and do not include any processor fees. Please recognize that processors also have a cost of doing business, plus a profit margin, so your actual costs will be higher.

* These networks offer pin-less debit.

Accell Effective November 1, 2010

ACCEL “All Other PINless” Bill Payments Cap 0.80% + $0.25, cap $1.75

According to ATM debit news, Interlink, Star, Pulse, and NYCE have the largest the market share for PIN based POS debit transactions. The shares are Interlink 39.8%, Star 30%, Pulse 10.7%, NYCE 10.1% and rest other 15%, as of March 2008.

CenPOS will dynamically route pin debit transactions to the lowest cost network, in compliance with the rules that apply for that card. What does that mean? If a consumer card can be used on three debit networks (see logos on back of card), including for example-  Interlink, and there is a rule that Interlink must be used first if the transaction is in the state of Alabama, then the transaction is routed to the Interlink network if the transaction is in Alabama. However, if there are no applicable rules, then the transaction will be routed to the lowest cost network, such as Star, for example.

The Shazam Debit Network has announced fee changes effective November 1, 2010.  These are network costs, not inclusive of additional fees your processor may incur and pass on, or profit added. Notice that the basic pin debit transaction is now .75% plus $.15 per transaction.

Secure Internet PIN Debit Transactions Deliver Issuers Reduced Fraud and Chargebacks

HOUSTON, July 14, 2010 — PULSE, one of the nation’s leading debit/ATM networks, is bringing the security, reliability and convenience of PIN debit to online shopping with the introduction of PULSE^® Internet PIN debit.

Financial institutions using PULSE Internet PIN Debit can deliver convenient PIN-based, online transaction verification to a growing number of consumers who purchase products from e-commerce merchants. The new payment solution, which uses Acculynk’s PaySecure^® Internet PIN debit software, reinforces the issuer and cardholder relationship by using a financial institution-branded graphical PIN pad.

According to a forecast from Javelin Strategy & Research, online retail transaction volume is expected to reach $268 billion by 2013. However, as many as 15 percent of debit cardholders have PIN-only debit cards, which previously could not be used for Internet purchases.

A separate Javelin study conducted last year found that 79 percent of consumers surveyed would feel more comfortable using debit cards online with a PIN than without it. PULSE network issuers can now address this need with Internet PIN debit transactions, giving cardholders the option to use their PIN debit cards for e-commerce in an easy and safe manner.

PULSE confirmed cardholders’ acceptance of the technology in a 2009 pilot, which used PaySecure. In the pilot, 54 percent of debit cardholders paying for online purchases preferred to enter a PIN when presented with the choice of PIN or signature options to complete the transactions. Additionally, chargebacks were reduced 77 percent compared to signature debit transactions, and there were no instances of fraudulent transactions.

“Our successful pilot confirms that debit cardholders are comfortable entering a PIN when shopping online,” said Judith McGuire, PULSE senior vice president of product management. “With PULSE Internet PIN debit, financial institutions can offer cardholders a secure, trusted and preferred payment option for online purchases. The product gives consumers with PIN-only debit cards a new payment choice, and should appeal to cardholders who already prefer to enter their PIN at brick-and-mortar retailers.”

How PULSE Internet PIN Debit Works
When consumers check out in the usual manner from a merchant website using cards that participate in PULSE Internet PIN Debit, they are given the option of completing the transaction with a PIN. Consumers who select this option are prompted to enter their PIN to complete the transaction, using a graphical, scrambling PIN pad that can be customized with the card issuer’s logo and debit card design. The cardholder clicks the mouse on a number and the PIN pad re-scrambles as each subsequent digit is selected. The PIN is not captured on the computer, nor is it transmitted over the Internet.

The solution makes a general phishing attack difficult because several unique attributes are displayed during the transaction, including merchant branding, financial institution identifiers and the VeriSign Secured^® Seal. In addition, Acculynk’s Internet PIN debit software service is integrated directly into the online checkout process, eliminating the need for cardholders to enroll or be redirected to another site to complete purchases.

A demonstration of PULSE Internet PIN Debit and more product information is available at www.pulsenetwork.com/ipd.

About PULSE
PULSE, a Discover Financial Services (NYSE: DFS) company, is a leading ATM/debit network, serving more than 4,400 banks, credit unions and savings institutions across the United States. The network links cardholders with ATMs and POS terminals at locations nationwide. Through its global ATM network, PULSE provides worldwide cash access for Diners Club and Discover cardholders through hundreds of thousands of ATM locations. The company is also a source of electronic payments research and is committed to providing its participants with education on emerging products, services and trends in the payments industry. For more information, visit www.pulsenetwork.com.

To clarify the 2010 Debit Pin Entry Device standard merchants are expected to comply with by July 2010, not all merchants will need to change their pinpads. If you deployed a POS PED by December 31, 2007 AND it was on the 2004-2007 Visa PCI lab approved list, you have until December 31, 2014 to replace it.

If you do not meet that requirement, then you’ll need to replace your PED by July 1, 2010 with a unit that meets the new Triple Data Encryption Standard (TDES) standard. Look carefully. There are companies that will sell you units that do not comply with the new standard.

POS- Point Of Sale

PED – Pin Entry Device

POS PED- a device in a merchant location where the customer is present at the time of the transaction.

Pinpad – pin pad- another name for PED

Triple DES- Triple Data Encryption Standard

3DES – same as above

OVERVIEW OF THE 2010 PCI COMPLIANCE RULE FOR DEBIT PIN ENTRY DEVICES:

The new standard is to improve the security of customer debit cards. The technology has been widely implemented over a number of years in ATM’s and such, and merchant pinpads are the last piece to complete.

DEADLINES:

July 1, 2010 If your unit was deployed after 12/31/2007 and it does not have Triple DES encryption, then you need to replace it. Any unit deployed prior to 2004 needs to be replaced.

12/31/2014 If you deployed a POS PED by December 31, 2007 AND  it was on the 2004-2007 Visa PCI lab approved list, then you must replace with a PCI SSC POS PED by this date.

When you deployed your PED is a matter of record with your current service provider. Where is a copy of the 2004-2007 Visa PCI lab approved list? https://partnernetwork.visa.com/vpn/global/category.do?userRegion=1&categoryId=19&documentId=33

HOW DO I VERIFY IF I HAVE A PCI COMPLIANT PED?

The PCI Data Security Standards Council has an updated list for all merchant providers. List of PCI compliant PEDs

WHICH NEW PIN ENTRY DEVICE DO YOU RECOMMEND?

First, make sure the unit has Triple Data Encryption Standard (TDES) certification. Just because someone is selling it, doesn’t mean it’s TDES. The PED must be matched to your terminal and the merchant services provider. You can’t just pick any unit and attach it. A hugely popular unit is the

First Data FD-10 debit pin pad

because First Data is one of the largest payment processors in the country. Many merchant providers utilize the First Data system, therefore can use the unit. Additionally, it works with many different desktop terminals.

If you need to upgrade, now is the time to look at your entire system. Do you need a PED or would you be better off with a signature capture terminal that has an integrated PED? You can get a wireless, desktop or, or even a device that connects to a host based system like CenPOS that provides incredible benefits for organizations processing $1 million per month and up.  Take a look at the Ingenico i6580, a top of the line unit.

ingenico i6580 i6550

In summary, I like units that have in integrated Debit PED over a separate device that attaches. Oh, and this is another area that you have to be very careful reading product description text. Some product technical descriptions say they accept debit cards but they are not referring to accepting pin debit transactions! As if merchants don’t have enough to get confused about.

All debit PED’s must be encrypted. This is done via a process called an injection. There are a limited number of facilities in the USA that can perform the injection. That means you should not wait until the last minute because a lot of other people will.

3D Merchant Services is an authorized reseller for current equipment ONLY for major brands including Verifone, Hypercom, and Ingenico. We also offer Nurit, Way and other brands. Because of our high volume, we have wholesale prices compared to others. We’re independent- you can use our credit card processing or not. We don’t give free equipment- you’ll get a better deal on your processing and your equipment if you keep the transactions separate. Equipment is never really free.

Related article:

Which Verifone pin entry devices are pci compliant?